woensdag 9 december 2015

Corporate Loan Charge-Offs and Delinquencies Vs. Fed Funds Rate

Corporate loan charge-offs are bad debts on the balance sheet that will be written off and will negatively affect earnings.

Delinquencies are obligations that have missed payment beyond their due date. If these delays keep on going for too long, the corporation is declared bankrupt.

What we see below is that the Fed Funds Rate is a leading indicator for these charge-offs and delinquencies. Every time the Fed Funds Rate is increased, charge-offs and delinquencies surge with a 6 month delay.

As delinquencies were already surging in 2015, it will be nearly impossible for the Federal Reserve to increase interest rates in 2016. The Federal Reserve is trapped.

Graphic below adds total revolving credit, which is the line of credit as a last resort, typically triggered when delinquencies rise.